As 2025 begins, our friends, neighbors and clients want to know what’s in store for residential real estate. To address this question, it’s important to know where we are now and the direction in which homeowners and homebuyers hope to go. The high cost of borrowing money has not only discouraged younger homebuyers from entering the market, but has also induced potential home sellers to hold off on moving. Indeed, if you sell your home chances are you will need to buy one at a higher interest rate than you currently have. Unfortunately, it comes as no surprise that the average age of the first-time homebuyer today is 38, a sharp increase from 40 years ago when it was in the late 20’s. In addition to the high cost of borrowing, a persistent lack of inventory and high prices have contributed to something of a national housing affordability crisis.
How can we get out of this crisis? The health of the overall economy is a key factor. Low unemployment and increasing consumer confidence have been prevalent in recent months; these trends generally strengthen the real estate market. On the flip side, persistent, sticky inflation and its myriad effects remain a shadow hanging over everything economic, including the real estate sector. There seems to be a clear consensus that the inflation-fueling federal budget deficit, which currently stands at nearly $2 trillion annually and growing, has prevented a long hoped-for reduction in mortgage interest rates. As National Association of Realtors (NAR) chief economist Lawrence Yun has stated, “With a large budget deficit, there’s less mortgage money available.” Yun has also noted that the federal deficit will prevent mortgage rates from falling further.
The new Administration in the White House has promised to tackle inflation and reduce wasteful spending. This is not the first comprehensive effort to rein in federal spending, and there is some warranted skepticism about its chances of success. This skepticism is buttressed by the many deficit-increasing tax breaks and tax extensions that are expected to be proposed. But if there is some progress on whittling down the current $2 trillion deficit, inflation may concurrently subside. This, in turn, could induce the Fed to further lower the federal funds rate which might put downward pressure on mortgage rates.
These occurrences surely represent a lot of dominoes that must fall into place. Moreover, there is not always a correlation between the Fed’s rate cuts and lower mortgage rates. Indeed, the Fed’s December 2024 25 basis point cut was actually followed by a spike in mortgage rates. It is an open question, not one to which we have a quick and easy answer, whether the new powers-that-be in the federal government will succeed where others failed. We will be watching and communicating with you on these issues in the coming weeks and months.
Wishing you health and happiness in the New Year!